Investors who are looking for income and diversification may consider investing in exchange-traded funds (ETFs) that employ the covered call strategy. Covered call ETFs are funds that hold a portfolio of stocks and sell call options on the same or a related index to generate income from the option premiums. The covered call strategy can enhance the yield and reduce the volatility of the portfolio, but it also limits the upside potential in a rising market.
JPMorgan Chase & Co. is one of the leading providers of covered call ETFs, offering two funds that target different segments of the US equity market: the JPMorgan Equity Premium Income ETF (JEPI) and the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ). Both funds are actively managed and use equity-linked notes (ELNs) to synthetically replicate the covered call overlay.
In this article, we will compare and contrast JEPI and JEPQ in terms of their objectives, strategies, performance, costs, holdings, and risks. We will also provide some guidance on how to choose between them based on your investment goals and preferences.
Objectives and Strategies
JEPI and JEPQ have similar objectives and strategies, but they differ in their underlying indexes and stock selection methods. Both funds aim to provide:
- A majority of the returns delivered by their respective benchmark indexes;
- A lower volatility compared to their respective benchmark indexes;
- A consistent level of incremental income, usually at a level above their respective benchmark indexes and on a monthly basis.
Both funds use ELNs to implement the covered call strategy, which involves selling out-of-the-money call options on their respective indexes and receiving option premiums in return. The option premiums are used to enhance the income distribution of the funds. The funds also hold a portfolio of stocks selected from their respective benchmark indexes using a proprietary, data-science driven investment approach.
The main difference between JEPI and JEPQ is their underlying indexes. JEPI tracks the S&P 500 Index, which is a broad-market index of 500 large and mid-cap US equities. JEPQ tracks the Nasdaq 100 Index, which is a narrower index of 100 of the largest non-financial US equities traded on the Nasdaq exchange.
The difference in the underlying indexes results in different sector exposures and risk-return profiles for both funds. JEPI has a more balanced sector allocation, with exposure to sectors such as financials, health care, industrials, consumer staples, and utilities. JEPQ has a more concentrated sector allocation, with exposure to sectors such as technology, communication services, consumer discretionary, and health care.
Performance and Costs
JEPI and JEPQ have different performance and costs characteristics, depending on the market conditions and time periods. Both funds have delivered strong returns since their inception, but they have also experienced periods of underperformance relative to their benchmarks.
According to this page, as of June 30, 2023, JEPI has an annualized return of 13.33% since its inception in May 2020, while JEPQ has an annualized return of 8.65% since its inception in September 2020. However, in the year-to-date period as of June 30, 2023, JEPI has a return of 7.32%, which is significantly lower than JEPQ’s return of 27.33%.
The difference in performance can be attributed to several factors, such as:
- The relative performance of the S&P 500 Index versus the Nasdaq 100 Index;
- The impact of the covered call strategy on the upside potential and downside protection of both funds;
- The stock selection and portfolio construction methods used by both funds.
Both funds have also delivered high yields since their inception, but they have also experienced fluctuations in their distributions. According to this page, as of June 30, 2023, JEPI has a trailing 12-month yield of 8.48%, while JEPQ has a trailing 12-month yield of 7.65%. However, both funds have seen their yields decline from their peak levels in late 2020 and early 2021.
The fluctuations in yield can be attributed to several factors, such as:
- The changes in the option premiums received by both funds;
- The changes in the net asset values (NAVs) of both funds;
- The changes in the distribution policies of both funds.
Both funds have low costs compared to other covered call ETFs, but they have different expense ratios and trading costs. According to this page, as of June 30, 2023, JEPI has an expense ratio of 0.35%, while JEPQ has an expense ratio of 0.45%. However, JEPI has a higher trading volume and a lower bid-ask spread than JEPQ, which means that it has lower trading costs and higher liquidity.
The difference in costs can be attributed to several factors, such as:
- The size and scale of both funds;
- The complexity and efficiency of both funds;
- The demand and supply of both funds.
Holdings and Risks
JEPI and JEPQ have different holdings and risks characteristics, depending on their underlying indexes and stock selection methods. Both funds hold a portfolio of stocks selected from their respective benchmark indexes using a proprietary, data-science driven investment approach. However, the number, composition, and weightings of the stocks vary between both funds.
According to [this page], as of June 30, 2023, JEPI holds 100 stocks, while JEPQ holds 50 stocks. The top 10 holdings of JEPI account for 23.5% of the portfolio, while the top 10 holdings of JEPQ account for 55.7% of the portfolio. The top holdings of JEPI include Apple, Microsoft, Amazon, Facebook, and Berkshire Hathaway. The top holdings of JEPQ include Apple, Microsoft, Amazon, Tesla, and Alphabet.
The difference in holdings can result in different risk exposures and diversification benefits for both funds. JEPI has a lower concentration risk and a higher diversification benefit than JEPQ, as it holds more stocks with lower weightings. JEPQ has a higher concentration risk and a lower diversification benefit than JEPI, as it holds fewer stocks with higher weightings.
Both funds also have different sector exposures and factor exposures due to their underlying indexes and stock selection methods. JEPI has a more balanced sector exposure than JEPQ, as it covers more sectors with lower weightings. JEPQ has a more concentrated sector exposure than JEPI, as it covers fewer sectors with higher weightings.
According to [this page], as of June 30, 2023, the sector breakdown of JEPI is as follows:
- Technology: 22.9%
- Health Care: 15.2%
- Financials: 14.8%
- Consumer Discretionary: 11.9%
- Industrials: 10.1%
- Communication Services: 8.7%
- Consumer Staples: 6.9%
- Utilities: 3.4%
- Energy: 2.8%
- Materials: 2.6%
- Real Estate: 0.7%
The sector breakdown of JEPQ is as follows:
- Technology: 48.1%
- Consumer Discretionary: 21.4%
- Communication Services: 18.5%
- Health Care: 11.1%
- Industrials: 0.9%
Both funds also have different factor exposures due to their underlying indexes and stock selection methods. Factors are characteristics or attributes that explain the risk and return behavior of stocks. Some common factors include size, value, growth, quality, momentum, volatility, dividend yield, etc.
According to [this page], as of June 30, 2023, the factor breakdown of JEPI is as follows:
- Size: Large
- Value/Growth: Blend
- Quality: High
- Momentum: Low
- Volatility: Low
- Dividend Yield: High
The factor breakdown of JEPQ is as follows:
- Size: Large
- Value/Growth: Growth
- Quality: High
- Momentum: High
- Volatility: High
- Dividend Yield: Low
The difference in factor exposures can result in different risk-return trade-offs and performance drivers for both funds. JEPI has a lower risk and lower return profile than JEPQ, as it has exposure to low volatility and high dividend yield factors. JEPQ has a higher risk and higher return profile than JEPI, as it has exposure to high growth and high momentum factors.
How to Choose Between JEPI and JEPQ
Choosing between JEPI and JEPQ depends on your investment goals and preferences. Both funds can provide income and diversification benefits for investors who are looking for covered call ETFs that target different segments of the US equity market.
However, there are some factors that you may want to consider before investing in either fund, such as:
- Your risk tolerance and return expectations;
- Your time horizon and liquidity needs;
- Your tax situation and distribution preferences;
- Your sector exposure and factor exposure preferences;
- Your cost sensitivity and trading frequency.
Based on these factors, you may prefer one fund over the other or allocate your portfolio between both funds according to your desired asset allocati
conclusion
JPMorgan Chase & Co. is one of the leading providers of covered call ETFs, offering two funds that target different segments of the US equity market: the JPMorgan Equity Premium Income ETF (JEPI) and the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ). Both funds are actively managed and use equity-linked notes (ELNs) to synthetically replicate the covered call overlay
